Hospitals, health care providers, and managers of other businesses across the country may be surprised to learn that under a new federal court ruling, their organizations may now qualify as government contractors or subcontractors simply because they contract with Health Maintenance Organizations (“HMOs”) and other health plans, which in turn contract with the federal government. As a result, these hospitals and other employers may have to comply with the affirmative action and other onerous requirements of the U.S. Department of Labor’s Office of Federal Contract Compliance Programs (“OFCCP”) and be subject to audits—or face litigation, financial penalties, and other consequences for noncompliance.

On March 30, 2013, a D.C. federal district court ruled that three University of Pittsburgh hospitals qualify as federal subcontractors, thus subjecting them to the authority—and compliance requirements—of the OFCCP. This decision, UPMC Braddock v. Harris, is expected to have wide-ranging effects for health care providers and other employers across the country, and now is the time for hospitals, health care providers, and other entities to take action to stay ahead of what promises to be a hot area for government regulation.

Background on the OFCCP
The OFCCP is an enforcement agency tasked with ensuring that employers who conduct business with the federal government do not violate nondiscrimination laws and comply with federal affirmative action requirements.

In particular, the OFCCP administers and enforces federal laws and Executive Order 11246, which prohibit federal contractors and subcontractors from discriminating against certain protected classes. These laws also require that government contractors and subcontractors meet specific affirmative action obligations, including the preparation and submission of annual “affirmative action plans.”

Genesis of the case
Three hospitals affiliated with the University of Pittsburgh Medical Center (“UPMC”) contracted with the UPMC Health Plan (“the Plan”), an HMO, to provide medical services to Plan members. The hospitals’ original agreements with the Plan date back to 1995, before the Plan participated in the Federal Employees Health Benefits Plan (“FEHBP”). In 2000, the Plan contracted with the Office of Personnel Management (“OPM”) to provide services to members of the FEHBP. Each of the three hospitals renegotiated their contracts with the Plan after 2000, when the Plan was contracting with OPM. None of the agreements between the hospitals and the Plan referenced compliance with the Executive Order, Rehabilitation Act, or Section 402 of the VEVRAA.

In January 2004, the OFCCP wrote to the hospitals, stating they had been selected for a compliance review and requesting that the hospitals provide the OFFCCP with information demonstrating compliance. The hospitals responded that they were not federal government subcontractors, were not within the authority of the OFCCP, and were not required to comply with the equal opportunity requirements in the statutes and Executive Order. In response, the OFCCP filed administrative complaints against the three hospitals in November 2006. An administrative law judge (“ALJ”) ruled in favor of the OFCCP. The hospitals appealed to the USDOL’s Administrative Review Board (“ARB”). In May 2009, the ARB upheld the ALJ’s decision. The three hospitals appealed to federal district court.

The court ruling
The D.C. federal district court upheld the ARB’s decision and granted summary judgment in favor of the OFCCP. The hospital’s arguments—that the court rejected—are discussed below.

“But we specifically excluded medical service providers from the definition of ‘subcontractor!’”
The contract between the Plan and OPM excluded medical service providers from the definition of “subcontractor.” But the court held that “OPM and the Health Plan have no authority to define the contours of the equal opportunity laws governing federal procurement by devising their own meaning for the word ‘subcontractor.’ The definition of that word in the OPM/Health Plan contract has no effect on whether the hospitals lawfully may be regarded as government subcontractors.” In other words, the hospitals could not contract around the USDOL’s definition of “subcontractor” for purposes of equal opportunity compliance.

“We provide personal services to the Plan beneficiaries, and therefore we don’t meet the OFCCP’s definition of a subcontractor.”
The hospitals argued that the medical services that they provided were not necessary to the Plan’s ability to perform under the contract with the OPM, and that they did not perform, undertake or assume any portion of the Plan’s federal contract. But the court ruled otherwise on the basis that the contract between the Plan and OPM was a managed medical service plan, not just an insurance plan. Consequently, the court said, the hospitals provided the medical services to the Plan beneficiaries/federal employees which in turn enabled the Plan to fulfill the prime contract with OPM. Because it was an HMO, the Plan “did agree to supply medical care, not just insurance to federal employees,” and the Plan could not perform under the contract absent these services.

“Fair enough, but our services are not necessary to the fulfillment of the primary contract.”
The hospitals argued that the medical services that they provided were not necessary to the Plan’s ability to perform under the contract with the OPM, and that they did not perform, undertake, or assume any portion of the Plan’s federal contract. But the court felt otherwise. The contract between the Plan and OPM was a managed medical service plan, and not just an insurance plan, the hospitals provided the medical services to the Plan beneficiaries/federal employees which in turn enabled the Plan to fulfill the prime contract with OPM. Because it was an HMO, the Plan “did agree to supply medical care, not just insurance to federal employees,” and the Plan could not perform under the contract absent these services.

“Well, we never consented to any of this!”
The court was not impressed by the hospitals’ argument that they never agreed to become government contractors, much less be bound by the equal opportunity clauses that OFCCP regulations require be included in covered federal contracts. The court ruled that express consent is not required. The OFCCP’s equal opportunity clauses are deemed to apply to covered federal entities by operation of federal law—not contract law. In other words, “a mandatory contract clause that expresses a significant or deeply ingrained strand of public procurement policy is considered to be included in a contract by operation of law.”

Potential appeal
UPMC is still within its time to appeal this decision; however, it faces an uphill fight since courts have to presume that final agency decisions such as the USDOL’s ARB determination here are valid, and they may only overturn a decision if they find that the determination was “arbitrary, capricious, an abuse of discretion, otherwise not in accordance with law, or unsupported by substantial evidence.” And though the court’s ruling is not currently binding outside of the District of Columbia, the OFCCP can be expected to apply the court’s reasoning in this case to its enforcement activities throughout the U.S.

Next steps
Looking to the future, the likely effect of this decision will be that some hospitals and other health care providers that have not previously complied with OFCCP requirements may now need to do so. And in fact, the OFCCP may even attempt to apply the reasoning of this decision beyond the health care context, to other businesses that contract with federal contractors. Many providers already comply with OFCCP requirements, and this decision should not have an impact on them. On the other hand, those businesses that contract with federal contractors but that do not comply with OFCCP requirements should revisit their contracts to analyze whether they have stepped into a “subcontractor” relationship under this decision.

In analyzing whether a hospital or health care provider is a “subcontractor,” the contract language will not dictate whether a subcontractor relationship arises, but rather, the nature of the health care provider’s relationship to the health plan—and the nature of the health plan’s contract with the government—will be determinative. If the provider contracts to provide services that are “necessary” to a health plan’s performance of a prime government contract, or performs a portion of a health plan’s duties under the federal contract, the provider may be subject to OFCCP requirements. Providers that supply medical care to an HMO that holds a prime government contract are likely to fall into this category. By contrast, if the OFCCP’s enforcement position stays consistent with its past practices, where the health plan and the government have entered into a contract for health insurance (as opposed to health care), and the health plan then simply reimburses the provider for medical services, those medical services will not be “necessary” to the performance of the federal contract and no subcontractor relationship will arise. The lines between these two categories can be blurred and difficult to determine, and so a careful, case-by-case analysis of each contract will be essential.

The risks of noncompliance include OFCCP compliance reviews (including desk audits and on-site visits), legal action, fines, and possibly even debarment from the ability to enter into federal contracts. As is evident from this case, which was touched off by a letter from the OFCCP in 2004, this process can be lengthy and resource-intensive. As a result, hospitals, health care providers, and other businesses that contract with federal contractors that are subject to OFCCP compliance requirements should be proactive in revisiting their contracts and making any necessary changes without delay.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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